Gundlach's base case is that interest rates will rise until they become untenable for the US Treasury (around 6% on the long bond). At that point, the government will be forced to intervene and control rates, causing a sudden, massive rally in long-term bonds.

The sharp drop in the fiscal impulse represents a direct, dollar-for-dollar hit to nominal GDP that has already occurred. This indicates a recession is underway, not forthcoming. The National Bureau of Economic Analysis (NBER) will likely backdate the start of this recession to the third quarter of 2025.

When national debt grows too large, an economy enters "fiscal dominance." The central bank loses its ability to manage the economy, as raising rates causes hyperinflation to cover debt payments while lowering them creates massive asset bubbles, leaving no good options.

The US is not facing a single issue but a convergence of multiple stressors. Unsustainable fiscal policy, fragile funding markets, geopolitical shifts, energy production issues, and leveraged financial players create a highly volatile environment where one failure could trigger a cascade.

Despite recent concerns about private credit quality, the most rapid and substantial growth in debt since the GFC has occurred in the government sector. This makes the government bond market, not private credit, the most likely source of a future systemic crisis, especially in a rising rate environment.

When a government's deficit spending forces it to borrow new money simply to cover the interest on existing debt, it enters a self-perpetuating "debt death spiral." This weakens the nation's financial position until it either defaults or is forced to make brutal, unpopular cuts, risking internal turmoil.

Large, ongoing fiscal deficits are now the primary driver of the U.S. economy, a factor many macro analysts are missing. This sustained government spending creates a higher floor for economic activity and asset prices, rendering traditional monetary policy indicators less effective and making the economy behave more like a fiscally dominant state.

Historically, countries crossing a 130% debt-to-GDP ratio experience revolution or collapse. As the U.S. approaches this threshold (currently 122%), its massive debt forces zero-sum political fights over a shrinking pie, directly fueling the social unrest and polarization seen today.

The U.S. government's debt is so large that the Federal Reserve is trapped. Raising interest rates would trigger a government default, while cutting them would further inflate the 'everything bubble.' Either path leads to a systemic crisis, a situation economists call 'fiscal dominance.'